U.S. Supreme Court’s upcoming decision on arbitration agreements and its impact on employers

The U.S. Supreme Court heard oral arguments on October 2, 2017 in Epic System Corp. v. Lewis. And while the case may not make headline news, it has very important ramifications for employers across the country. At issue is whether employers can legally compel employees to enter into arbitration agreements which contain class action waivers. The decision is likely to be decided by the U.S. Supreme Court this December. Below are five issues regarding the Supreme Court’s decision and the impact it may have on employer’s businesses going into 2018:

1. There is a split in Circuit Courts regarding if arbitration agreements with class action waivers are enforceable

Many courts have been upholding arbitration agreements that contain class action waivers, including the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC. That case held that class action waivers are enforceable, following the standards set forth by the U.S. Supreme Court in AT&T Mobility v. Concepcion.

However, the Ninth Circuit’s ruling in Morris v. Ernst & Young holding that a class action waiver in an arbitration agreement is unenforceable because the class action waiver is contrary to the rights provided to employees under the National Labor Relations Act (“NLRA”). The arbitration agreements in the Morris case were mandatory, and they contained a “concerted action waiver” clause preventing employees from bringing a class action. Plaintiffs claimed that the “separate proceedings” clause contravenes the NLRA, 29 U.S.C. §§ 151 et. seq. The Ninth Circuit held:

This case turns on a well-established principle: employees have the right to pursue work-related legal claims together. 29 U.S.C. § 157; Eastex, Inc. v. NLRB, 437 U.S. 556, 566 (1978). Concerted activity—the right of employees to act together—is the essential, substantive right established by the NLRA. 29 U.S.C. § 157. Ernst & Young interfered with that right by requiring its employees to resolve all of their legal claims in “separate proceedings.” Accordingly, the concerted action waiver violates the NLRA and cannot be enforced.

This holding is contrary to the holdings in the Second, Fifth, and Eight Circuits that have concluded that the NLRA does not invalidate collective action waivers in arbitration agreements. This split in circuit courts will be resolved by the U.S. Supreme Court’s holding in Epic System Corp. v. Lewis.

2. U.S. Department of Justice changed its position to support class action waivers

Under the Obama Administration, the DOJ supported the position taken by the NLRB that class action waivers found in arbitration agreements violated Section 7 of the NLRA. However, under the Trump Administration, the DOJ has changed its view and in the summer of 2017 filed an amicus brief explaining it now does not believe class action waivers violate the NLRA. This further adds to the split in authority that will be resolved by the U.S. Supreme Court’s ruling in Epic System Corp. v. Lewis.

There are a number of benefits for California employers to have arbitration agreements. One major benefit is the class action waiver discussed above. For large employers this can be an effective bar from employees bringing class actions. However, in California, employees still have rights to pursue “representative actions” under the Private Attorneys General Act (PAGA) as discussed below. Moreover, the arbitration process can proceed faster than civil litigation, saving a lot of time and attorney’s fees in the process. For example, often the discovery process moves faster in arbitration, and if there are any disputes, the parties can raise them with the arbitrator telephonically, instead of the lengthy and formal motion process required to resolve disputes in civil court.

The arbitration process is also confidential, so if there are private issues that must be litigated, these issues are not filed in the public records of the courts. The parties also have a say in deciding which arbitrator to use in deciding the case, whereas in civil court the parties are simply assigned a judge without any input into the decision. This is very helpful in employment cases, which often involves more complex issues, and it is beneficial to the parties to select an arbitrator with experience in employment law.

4. Potential drawbacks of arbitration agreements in California

While there are many benefits of arbitration agreements, they do not come without a few drawbacks. The primary drawback is that in California, the employer must pay all of the arbitrator’s fees in employment cases. Arbitration fees can easily be tens of thousands of dollars – a cost that employers do not need to pay in civil cases. However, if the company values the confidentiality and speed of process provided in arbitration, and potentially limiting class action liability exposure, this extra cost may well be worth it.

In addition, even if the U.S. Supreme Court rules in favor of employers in Epic System Corp. and upholds the use of class action waivers, the California Supreme Court held that employees may still bring representative actions under the Private Attorneys General Act (PAGA). Even though PAGA claims are limited to specific penalties under the law, and have a much shorter one-year statute of limitations than compared to potentially a four-year statute of limitations for most class actions brought for unpaid wages under the Labor Code, the potential penalties under PAGA can still be substantial for employers.

5. Impact on employers

Employers who utilize arbitration agreements will need to monitor the Supreme Court’s decision in Epic System Corp. If the Supreme Court rules that class action waivers violate Section 7 of the NLRA, employers will need to review and potentially modify any arbitration agreements with class action waivers. Such a ruling could spur many more class actions. With that said, employers should always be auditing their wage and hour policies and practices to ensure compliance with Federal and state laws.

If the Supreme Court holds that arbitration agreements with class action waivers do not violate Section 7 of the NLRA, it is likely that employers can continue to implement the agreements with employees. However, as mentioned above, California employers still must remain vigilant about their wage and hour practices, as there is still substantial liability under representative actions under PAGA.